Wrecking Convention
By Julien B. Booth
November 11, 2016
To all those who have served, Thank You. We appreciate your service to The United States of America. A special thought for the family of Warren Schmitt (retired Marine Corps.) who passed this week and Lt. John M. Johnson (our office colleague). “
You never lose. You either Win or you Learn” -Avinash Wandre
President-Elect Donald Trump’s unexpected win is wrecking convention and the policies of the past 8+ years – with unseen speed. We have come to expect Government to move slowly…not anymore it appears. The fallout will likely be substantial – and potentially violent.
In the wake of the election the bond market has been wrecked. Reason – massive growth spending and deficits that will produce higher inflation and a heavier U.S. debt load. Markets price expectations – not reality per se. Today, economic growth remains feeble and the “expansion” is far beyond their normal duration. Tomorrow…?
The pain inflicted on income investments has been substantial. Excluding hyperbole, this event has been the 2nd worst week, in 20 years, for bonds – and that is a long time. Per Bloomberg… https://goo.gl/LKEISP . We are value investors first and foremost…conventional bonds have offered little value – and a lot of interest rate (duration risk in our language) for some time now. Per our previous 2016 notes, the primary value has been in fixed to floating bonds, closed end funds of the like, and credit stories where our Research Company, Sixty Guilders, has particular insight/valuation.
At Forest Capital we eat our own cooking. We Hate to give up some of the gains we had made in 2016. Realistically, double digit gains in fixed income were well beyond reasonable expectations in a 1% world. Expectation is the root of all heartache, as they say.
Uncertainty and anxiety are generally times where we: 1st: Sit on our hands, calm down, and wait for markets to adjust, and 2nd: Look for opportunity. At the moment we are treading cautiously – still too soon, but are seeing some very attractive opportunity in closed end funds whose market prices have been decimated (down 6% or greater), yet their underlying NAV is relatively flat.
We like to buy fear. I am not convinced economic cycles have been repealed and replaced. Prudent investment strategies are durable.
As usual, thank you for investing with Forest Capital! For additional information on portfolio positioning, please contact Forest Capital directly at jbooth@forestcapital.net.